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1 Introduction
Jørgen Wettestad and Lars H. Gulbrandsen
The emergence of emissions trading
Global climate change caused by anthropogenic sources – greenhouse gas emissions from human activity – is widely seen as a ‘malign’ or ‘wicked’ problem (Miles et al. 2002; Jordan and Huitema 2014).1 The problem is a by-product of multiple necessary societal activities all around the globe, such as burning fossil fuels for electricity, heat and transportation; industrial production; and agriculture. The actors involved are numerous, and policy-makers struggle to find the best ‘cures’ and policy responses. Essentially, what is required is a broader low-carbon transformation – meaning significant transition costs. It is widely acknowledged that such a low-carbon transition is needed, but wealth and energy systems vary considerably, and with mitigation and transition costs unevenly distributed among and within countries. This helps explain why the idea of flexible policy measures, based on economic incentives, has emerged. Carbon pricing is seen by many as a better way of addressing the multifarious policy challenges at hand than more rigid command-and-control measures (see e.g. Stern 2006).
Taxes belong to this category of carbon-pricing instruments. But taxes have a long history of being politically difficult to implement. Enter emissions trading, which is favoured by many in industry who worry about compliance costs and is tolerable to many in the environmental community who are keen to see an absolute cap on emissions. A fundamental reason for the growing interest from governments as well as industries and other stakeholders is that emissions trading systems (ETS) leave governments in control of total emission levels in the ETS sectors and the basic rules for market transactions – while stakeholders are free to determine how many emissions permits to buy or sell. This instrument uniquely combines elements of political governance and ‘steering’ with flexibility. But it is also complex, and has in practice run into various problems, to which we return throughout this book.
This volume examines the proliferation of emissions trading, which has increasingly been adopted as a response to the ‘super-wicked’ climate problem. As some systems are frontrunners while others have taken up ETS more recently, it is crucial to understand interaction and learning among the various systems. In particular, we are interested in the diffusion of emissions trading across jurisdictions. In international relations theory, policy diffusion has been understood as ‘interdependent, but uncoordinated, decision making’ in which one jurisdiction unilaterally adopts a policy or practice pursued by another jurisdiction (Elkins and Simmons 2005: 35). As explained in the following, the key focus of this book is the role of policy diffusion for ETS design outcomes around the globe.
According to the Elkins/Simmons definition, diffusion is a process generally seen as leading to convergence, as jurisdictions adopt similar policies or practices. This expectation of convergence is understandable because earlier work, including that of Elkins and Simmons, examined processes in which there were strong incentives for convergence. However, the ETS experience has entailed fewer such pressures, as we will show. Hence, we adopt a broader understanding of diffusion that allows for divergence. While such an understanding of diffusion might constitute ‘concept stretching’ (Sartori 1970), we maintain that our interpretation is consistent with definitions framed in terms that allow also for divergence.
Specifically, we adopt the definition proposed by Simmons et al. (2006: 787): ‘international policy diffusion occurs when government policy decisions in one country are systematically conditioned by prior policy choices made in another country (sometimes mediated by the behaviour of international organizations or even private actors or organizations)’. Our broad understanding of diffusion processes is also better suited for the ETS experience and our focus on domestic political factors as mediating variables. That focus on domestic politics is the central explanation why our study finds more divergence in ETS design than earlier studies of diffusion have found.2
An important point of departure and reference for other systems is undoubtedly the EU ETS, adopted in 2003 and operational since 2005. In 2008, after the overhaul of the ETS for the third trading period (2013–20), the leader of the European Commission’s environment department at the time, Stavros Dimas, triumphantly declared: ‘the [EU] ETS is going to be the prototype for the world to imitate’ (ENDS Europe 2008).
But for proponents of carbon trading, the post-2008 era has definitely been a mixed experience (see Mehling 2012; Calel 2013; IETA 2016; World Bank 2016; ICAP 2016). The EU has experienced increasing problems, with a growing surplus of allowances and a low carbon price, caused not least by recessionary pressures. Furthermore, the growth of renewables has further lowered demand for allowances, highlighting the importance of smooth interactions with other policy instruments and of placing carbon trading systems in a broader political, social and cultural context.
Around the globe, other significant systems have started operating, like that in California, which covers the world’s seventh biggest economy. Of particular interest and importance is the turn to emissions trading in China, the world’s biggest greenhouse gas (GHG) emitter (some 10 billion tons CO2 per year). Seven subnational pilot systems have been established, and a national system, twice as large as the EU ETS, is to be introduced in 2017. There are also interesting developments elsewhere – such as smaller systems established in countries as diverse as Kazakhstan, Switzerland and South Korea, as well as countries such as Thailand, Brazil and Mexico now considering the introduction of emissions trading (see e.g. ICAP 2016). The December 2015 climate summit in Paris showed and offered further support to the increasing interest in carbon pricing worldwide. About half of the world’s countries signed pledges to the summit to reduce their emissions by means of carbon trade (ICAP 2016: 3).
The proliferation of emissions trading is indeed a fascinating development, and this volume builds upon and complements a rapidly increasing body of knowledge. Briefly summing up, there is valuable knowledge on several individual markets, particularly the EU and the Chinese pilots (see Skjærseth and Wettestad 2008; Zhang 2015; Wettestad and Jevnaker 2016; Goron and Cassisa 2017). As to more general markets and systems overviews, several useful mapping exercises have been conducted (e.g. EDF/IETA 2016; IETA 2016; ICAP 2016), including interesting anecdotal evidence (PMR/ICAP 2016). In addition, there are more general discussions of carbon markets (e.g. Meckling 2011; Stephan and Lane 2015; Rosenzweig 2016; Weishaar 2016), also highlighting the differing ‘cultures’ (Knox-Hayes 2016). Paterson et al. (2014) and Van Asselt (2016) are valuable contributions to the more specific issue of ETS diffusion.
Still, important research gaps need to be addressed. First, despite numerous helpful mapping exercises, there has been little systematic, in-depth, comparative research on ETS design. Second, there are several ETS systems that have hardly been examined in the academic literature; examples here are Kazakhstan, New Zealand and South Korea. Third, regarding ETS policy diffusion, most research has focused on diffusion of the ETS instrument per se, not specific design features (see Voss 2007; Betsill and Hoffman 2011; Meckling 2011; Paterson et al. 2014). Fourth, there has been little systematic research on how domestic politics and institutions act as mediating variables of international diffusion influences.
This volume provides in-depth studies of how policy diffusion has influenced ETS design in most of the systems operational today. We pay particular attention to design convergence and divergence across systems and the relationship between diffusion mechanisms, domestic politics and such outcomes. This examination can help us understand the emergence and evolution of ETS around the world, how these systems spread and ultimately the mechanisms and processes that influence their design and operation. Hence, we contribute both to policy diffusion theory and to lessons about ETS design with a clear policy relevance, not least in the aftermath of the Paris 2015 summit.
Research questions
The problems experienced by the EU ETS and other systems – in particular too many allowances handed out and too low carbon prices – have put the spotlight on the question of design: how to design systems that will yield a stable and reasonably high carbon price and at the same time will interact well with other policy instruments in fulfilling the overriding goal of achieving emissions reductions cost-effectively (see Klinsky et al. 2012). There is a substantial literature on ‘clean’ or ‘optimal’ cap-and-trade systems, but relatively little on how political and economic interests as well as other policy instruments affect the design and operation of these systems (but see e.g. Stephan and Lane 2015 and Knox-Hayes 2016). Furthermore, as systems develop at different speeds, with frontrunners and more recent adopters, the question of interaction among systems becomes increasingly pertinent. Such a focus on inter-system communication and learning creates links to rich and extensive debates in political science on how to conceptualize and understand policy diffusion (for overview of this debate and key references, see Chapter 2).
As noted, most ETS research has focused on the diffusion of systems for emissions trading as such, not on specific design characteristics. Further, studies dealing with the spread of particular design features have focused on similarities across systems – policy convergence – not differences across systems – policy divergence (Paterson et al. 2014). Similarly, Shipan and Volden (2012: 788) have observed that while much of the literature on policy diffusion focuses on the adoption stage, less is known about how the policy instruments that diffuse globally change over time. Hence, they argue, ‘Extending the policy diffusion literature beyond initial policy adoptions is warranted and long overdue’ (Shipan and Volden 2012: 793). Both convergence and divergence may be expected to occur as policy instruments evolve over time. Indeed, it has been observed that full convergence is not a necessary or even a likely outcome of diffusion because norms, ideas and practices often change in form and content as they diffuse (Gilardi 2013; Klingler-Vidra and Schleifer 2014: 264).
In this book, we examine diffusion as a causal mechanism and the link between diffusion mechanisms and design outcomes. The examination of specific diffusion mechanisms can help organize process tracing within the cases examined. In particular, it is possible to test if the chain of events and path dependencies one uncovers are consistent with one’s expectations based on a specific diffusion mechanism (see George and Bennett 2005).
Our focus in this book is on the design of ETS. The topic is important because more governments are looking to such market instruments in their search for ways of making deeper cuts in emissions. Design will have a big impact on whether these systems actually work as intended – and whether they perform in ways that align with the goals of important interest groups. Moreover, the extent to which they converge or diverge will shape whether different national systems can be linked into a more interconnected global system – an approach many analysts have been advocating for decades (e.g. Bodansky et al. 2015; Ranson and Stavins 2014).
Against this backdrop, in this book we examine the following overarching research questions:
- What are main ETS design similarities and differences in existing systems across the globe?
- To what extent and how can policy diffusion explain these similarities and differences?
- How can domestic politics serve as a mediating variable through which international diffusion processes affect design outcomes?
In addressing the first research question, we single out eight specific design attributes for further scrutiny in all case studies. As elaborated in Chapter 2, these design characteristics are:
- Type of system (e.g. cap-and-trade or baseline and credit)
- Ambitiousness (e.g. level of targets to achieve emissions reductions)
- Allocation method (free allocation or auctioning)
- Coverage (inclusion of sectors and gases in the system)
- Offset and linking rules (e.g. types of domestic offsets or credits based on the Clean Development Mechanism – CDM)
- Monitoring, reporting and verification (MRV) and compliance rules
- Price-management mechanisms (focused on quantity or price)
- Rules for earmarking of auctioning revenues.
We systematically map and compare these design features to see if there are any patterns in terms of similarities and differences across systems.
The second research question addresses a major research gap in the literature on emissions trading: the role of policy diffusion in shaping ETS design. In examining the extent to which and how policy diffusion affects ETS design, the chapters of this book focus on mechanisms and pathways of international policy diffusion. We identify four main types of diffusion mechanisms in the literature – coercion, competition, learning and emulation – and investigate the various diffusion mechanisms at play in the cases examined here. The intention is to explain not only what mechanisms are involved, but also where and how they lead to convergence or divergence.
Our third research question concerns the kind of outcomes likely to be produced by different diffusion mechanisms in a given setting. ETS systems as such do not respond to external impulses or learn from experience – that is what governments and other actors do. Consequently, we also provide substantial information about the role of various internal and domestic policy drivers in the different jurisdictions, including the role of governments and governmental agencies, parliaments, industries, environmental organizations, consultants and researchers and international organizations. Chapter 2 elaborates the possible role of those drivers, with attention to how domestic institutions and politics come into play at the stage of policy adoption and also the implementation stage.
We describe outcomes in terms of two rough dichotomies: whether ETS design outcomes converge or diverge, and whether there is movement upwards or downwards in design outcomes. Regarding the first dichotomy, our point of departure for this study is that policy diffusion can result in both converging and diverging designs. Likely outcomes on the second dichotomy can be roughly described as whether we see upwards change – towards more ambitious, more demanding systems design – or downwards change – towards less ambitious, less demanding systems design. These two dimensions are important for policy analysts, but also offer important insights for practical policy. Better understanding of conve...
